TMI Blog2021 (3) TMI 580X X X X Extracts X X X X X X X X Extracts X X X X ..... meeting, in abeyance till the outcome of the present application. HELD THAT:-The contention of the Applicant that there is no disbursal of any amount or loan to the Corporate Debtor and hence there is no financial debt is untenable. Here the loans were disbursed to RCOM entities and the Corporate Debtor had given guarantee in favour of the Respondents - When there is a Financial Debt due, irrespective of the fact that the same is defaulted or not, a claim can be made in the CIRP proceedings. For making a claim under CIRP, it is not required that the said debt should have been defaulted. We accept the contention of the Respondents that they were within their rights in filing the claim before the IRP as Financial Creditors. In this regard, the reliance of the Applicant on the judgement of SWISS RIBBONS PVT. LTD. AND ANR. VERSUS UNION OF INDIA AND ORS. [ 2019 (1) TMI 1508 - SUPREME COURT] is totally misplaced since Swiss Ribbons deals with the debt and default for triggering CIRP process and the issue of limitation. Neither the Section of law nor the Regulation says that the claim of a debt can be made only when there is a default. The debt and default would be a sine qua non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P (IB) NO. 1385/(MB)/2017 - - - Dated:- 2-3-2021 - Hon ble Member (Judicial), Janab Mohammed Ajmal Hon ble Member (Technical), Shri V. Nallasenapathy For the Applicant : Mr. Prateek Seksaria, Counsel i/b Juris Corp. For the Respondents : Mr. Ravi Kadam, Sr. Counsel and Mr. Gaurav Joshi, Sr. Counsel for R1 (RP) Mr. Janak Dwarkadas, Sr. Counsel for R2 Mr. Rohan Rajadhyaksha, Counsel for R3 Mr. Chetan Kapadia, Counsel for R4 and R5 ORDER Per : V. Nallasenapathy, Member (Technical) 1. The Applicant, a Financial Creditor of the Reliance Infratel Limited (RITL), the Corporate Debtor, filed this Application under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (the Code) seeking the following prayers against the Respondent/Resolution Professional and certain other Financial Creditors of the Corporate Debtor: a. To declare the decision of the resolution professional of the Corporate Debtor for recognizing the Indirect Lenders as the Financial Creditors of the Corporate Debtor as null and void; b. To de-recognize / declassify / delete the Indirect Lenders as Financial Creditors of the Corporate Debtor; c. To prepare a reconstituted committee of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries viz. RTL, as Financial Creditors of the Corporate Debtor, on the basis of a purported Deed of Hypothecation (DoH). 5. The following are the submissions of the Applicant in support of the Application: i. Consequent to the public announcement, inviting claims from the creditors, this Applicant preferred a claim before the IRP and the same was admitted. ii. The first meeting of the Committee of Creditors (CoC) was held on 30th May 2019 wherein a list of Creditors was circulated by the IRP. The Applicant along with other ECB Lenders namely Industrial and Commercial Bank of China, Emirates NBD Bank PJSC and VTB Capital PLC, who are the direct lenders and Financial Creditors of the Corporate Debtor under the Facility Agreements, challenged the classification of certain lenders, who are purportedly claiming to be the Financial Creditors of the Corporate Debtor on the basis of a purported Deed of Hypothecation. The Respondents have not produced the Deed of Hypothecation. iii. The RP convened the second meeting of the CoC on 09.07.2019, wherein, in the agenda notes, the list of Financial Creditors was placed, which did not contain the names of the Indirect Lenders and the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the relevant creditors in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016 and the rules and regulations framed thereunder. Based on the review of the documents, since the claim submitted by the said creditors constitutes financial debt, the same has been admitted by the resolution professional. As the claims and supporting documents submitted by each creditor are confidential in nature, the resolution professional shall not be in a position to share the same without the consent of the relevant creditors . A copy of the response is enclosed as Exhibit H to the Application. x. R1 has not disclosed the documents (including but not limited to the purported Deed of Hypothecation), on which he has relied upon for admitting the Indirect Lenders as the Financial Creditors of the Corporate Debtor. It is submitted that the understanding of R1 in admitting the Indirect Lenders as the Financial Creditors of the Corporate Debtor is erroneous and unsustainable, for the reason that the Corporate Debtor had executed the Deed of Hypothecation merely to secure the loans disbursed by the lenders of RCOM, RTL and Reliance Communications Infrastructure Limited (tog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... btor, the voting share of the Applicant (and the other ECB Lenders) has been drastically reduced which has severely affected the ability of the Applicant (and the other ECB Lenders) to participate in the CIRP of the Corporate Debtor. xvi. The only basis stated by R1 for admission of the claims of R2 to R5 is DoH which contains a covenant to pay in Clause 2 and undertaking to pay for any deficiency or shortfall in meeting of the dues by way of enforcement of security interest . Pertinently, the question of such enforcement, sale, and realisation does not arise in proceedings under the Code in as much as the same is alien either during CIRP or in case of liquidation. It is expressly admitted by the RP that there was no covenant of guarantee . Clearly these claims were neither made nor admitted on any assertion of the DoH containing any covenant of guarantee. xvii. Form C filed by R2 to R5 clearly establishes the following: (i) RCOM Lenders never construed Clause 5(iii) of the DoH to be in the nature of a guarantee but only as an undertaking to pay the amount of RCOM by taking steps to realise and sell security hypothecated. (ii) Claims filed by R4 and R5 describe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arantee in their favor and thereby entitles them to be recognized as Financial Creditors of RITL. The contention is contrary to the express provisions contained in Clause 4 16(iv) which clearly states that the Secured Lenders (non-parties) shall not have any right, title and interest under the DoH in relation to enforcement of security or otherwise. xxii. Clause 2 of the DoH - Covenant to Pay expressly records and states that it is the OBLIGOR who shall repay the facilities availed by it as stipulated in the facility documents and in the manner set out in the facility documents. Thus, under Clause 2, RITL has not covenanted that it shall repay/discharge the liability of the Obligor upon its default and hence the question of construing the same as a contract of guarantee does not arise. In any event, as stated above, reliance on Clause 2 has been given up by the Respondents during the course of hearing though pleaded in the application/reply. xxiii. Clause 5 is titled as Chargor s Covenants, Representations and Warranties . The same pertains to the procedure and obligation for creation of charge, preservation of charged assets, and enforcement, sale and realization thereo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, baseless and contrary to law for the following reasons: (i) There is no express or unequivocal promise to discharge the liability of the principal borrower in case of the principal borrower s default under the relevant facility agreements, which is a sine qua non for any document to constitute a contract of guarantee; (ii) There is no co-extensive liability of RITL under the DoH as alleged by the Respondents; (iii) The events as contemplated in the latter part of Clause 5(iii) are an impossibility in view of the express prohibition contained in section 14(1)(c) of the Code which prohibits any enforcement of security interest during the period of moratorium. Since the claim for shortfall under the DoH is consequent upon enforcement of security interest thereunder, at present, there is no shortfall and there cannot in any event arise a shortfall upon sale of hypothecated property as moratorium has been declared under section 14 of the IB Code; and (iv) Clause 5(iii) being a clause in relation to enforcement of security, is alien to the Code and therefore cannot be construed to give rise to any liability or debt in any event whatsoever. xxvi. Without prejudice to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutable in their usage under the Code. To buttress this point, the Applicant relied on the decision of the Hon ble Supreme Court in the case of Swiss Ribbons Pvt Ltd. Ors. Vs Union of India Ors. ((2019) 4 Supreme Court Cases 17), [paragraphs 63 to 65]. xxx. Merely having a claim is not sufficient compliance of Regulation 8 of the Regulations to classify a person as a Financial Creditor. xxxi. Next criteria for classification as Financial Creditor is not only the debt due but it must be in default . The default should be proved either by showing records available with information utility or from financial statements or from the order of Court or Tribunal that has adjudicated upon the non-payment of debt, under Regulation 8(2) of the Regulations. Therefore, it is submitted that for a claim of creditor to be accepted under Regulation 8(2), he is required to satisfy the mandatory criteria as specified therein as a proof of claim, failing which the claim cannot be accepted by the RP. In the present case the lenders of RCOM have not satisfied this requirement. xxxii. It is submitted that the scheme of the Code is not to satisfy the existence of claim but the existenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relevant lenders. The DoH which are similar in contents have been executed by RCOM entities including the Corporate Debtor to create charge over its property in order to secure the repayment and discharge of the facilities. d. The claims of the indirect lenders were based on the DoH. The following are the important provisions of the DoH: 2. Covenant to pay In pursuance of the Secured Facilities and the Facility Documents and in consideration of the Secured Lenders having made available the Secured Facilities to the Obligors for the purpose and subject to the terms and conditions set out in the Facility Documents and/or the other Security Document, each of the Chargors does hereby covenant with the Security Trustee that each Obligor shall repay the Security Facilities availed by it together with interest, liquidated damages, premia on prepayment, financing charges, remuneration payable to the Security Trustee, fees payable to any Secured Party, costs, charges, expenses and all other monies stipulated in the relevant Facility Documents in the manner set out therein and shall duly observe and perform all the terms and conditions of the relevant Facility Documents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity in respect of any guarantee or indemnity for any of the items referred to in sub-clause (a) to (h) of Section 5(8). Accordingly, on the basis of the covenant as undertaken by the Corporate Debtor under the DoH, especially under Clause 2 and 5(iii), the Corporate Debtor has covenanted that each obligor shall repay the Secured Facilities (as defined in the DoH) together with interest, liquidated damages and all other amounts payable to any secured party as well as undertaking to make good any shortfall in realisation of proceeds from enforcement/disposal of security. These obligations are in the nature of guarantee. f. A guarantee has been defined under Section 126 of the Indian Contract Act, 1872 as a contract to perform the promise, or discharge the liability, of a third person in case of his default. Since the obligations undertaken by the Corporate Debtor under DoH constitutes a contract to perform or discharge liability of a third party in case of default by the borrowers, it constitutes a guarantee and has been admitted as a financial debt under Section 5(8)(i) of the Code. It is submitted that the Code does not distinguish between direct and indirect lending and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation given in the 3rd meeting of the CoC with respect to admission of the claims, it is submitted that when one of the Financial Creditors in the said meeting raised a query was there any Deed of Guarantee in addition to the security and charged document? , the answer given was No, there was a covenant to pay by the Corporate Debtor in the DoH, along with an undertaking to pay for any deficiency or shortfall in meeting the outstanding dues. The Applicant misunderstood the query and the answer. l. The RP merely collates the claims, vets, verifies the same and prepares the list of creditors. The admission of a claim is only an administrative process for which the RP does not require to give reason for admission/rejection of the claim. By referring to the judgement of Hon ble Supreme Court in the case of Swiss Ribbon Pvt Ltd Vs Union of India Ors supra it is submitted that the RP has only verified the claim and he has not discharged any adjudicatory role. m. It is submitted that even though the Security Trustee has the right to enforce security under the DoH, the DoH does not take away the right of the Respondents to file claim before the RP that too in the CIRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor. R4 and R5 are also indirect lenders like R2 and R3. d. The Respondents filed their proof of claim with the IRP. The provisions of DoH (Specifically Clauses 2, 3 and 5(iii) of DoH) evidence that the Corporate Debtor has undertaken the obligation to pay all the outstanding debt of RCOM entities following their default as Principal Obligor. e. Relying on Section 18 of the Code and on judgement of Export Import Bank of India Vs Resolution Professional of JKEPL supra, it is submitted that RP has to collate the claim based on the public announcement made under Section 13 of the Code. The claim should be as on the date of initiation of CIRP and any person having a right to claim the payment under Section 3(6) of the Code is supposed to file the claim whether matured or unmatured. The question as to whether there is a default or not is not to be seen. a) The definitions of claim , creditor , debt , financial debt and Financial Creditor under the Code are as follows: i) Section 3(6): claim means- i. a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cilities. It is submitted that Section 5(8)(i) of the Code provides that the liability of Corporate Debtor under the guarantee of indemnity expressly provide for as a Financial Debt. Therefore, the claim made by the Respondents are in order. i. Referring to Clause 5(iii) of DoH supra, R2 to R5 submit that the same amounts to guarantee by the Corporate Debtor. The Respondents submitted the following analysis in support of their above contention: i) As per the first sentence of Clause 5(iii) beginning with in the event that an Event of Default , in the event of an Event of Default i.e., in this case, RCOM s default in making payment of the outstanding amounts under the Facility and the amount in default thereby being known, the Security Trustee is entitled to enforce the security against any of the Chargors (including the Corporate Debtor) and take steps to dispose of the Hypothecated Property (which includes the Charged Property of the Corporate Debtor). ii) as per the second sentence of Clause 5(iii) beginning with Notwithstanding any pending suit or other proceeding each of the Chargor undertakes , notwithstanding any suit or proceeding, each of the Chargors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... default. The person who gives the guarantee is called the surety ; the person in respect of whose default the guarantee is given is called the principal debtor , and the person to whom the guarantee is given is called the creditor . A guarantee may be either oral or written. m. On a bare reading of Section 126 of the Contract Act, it is clear that under Clause 5(iii) of the DoH, the Corporate Debtor has undertaken to discharge the entire liability of a third person (in this case, RCOM) in case of its default, by a combination of a sale of the Charged Property and by a personal covenant to make payment of any shortfall or deficiency. Accordingly, there can be no doubt that Clause 5(iii) of the DoH satisfies the ingredients of a contract of guarantee under Section 126 of the Contract Act. n. Section 128 of the Contract Act provides that the liability of the surety is coextensive with that of the principal debtor unless otherwise provided by the contract. Clause 5(iii) of the DoH also satisfies this ingredient. As a result of Clause 16(viii) of the DoH, in the event of a default from RCOM, the Security Trustee can take steps against the Corporate Debtor for recovery of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract between the issuer company and the trustee in form of the Trust Deed, would be impaired if these creditor beneficiaries were not accorded right to obtain relief against the promisor , and on this basis allowed noteholders (in that case) to file a winding up petition against the borrower directly by the creditor beneficiary despite their being a security trustee, notwithstanding an express restriction under the transaction documents. q. In view of this ruling, it is submitted that the respondents are entitled to file claim before the IRP as the Financial Creditors directly. Further, the rights of security trustee under the DoH are only for the purpose of enforcement of security and this is not a case of enforcement of security. r. Under Section 14(1) of the Code, only the right to enforce the security, if any, is suspended and not the liability to pay . In view of this, it is submitted that moratorium will not kick in or affect the liability of the Corporate Debtor to pay under the DoH. s. Reliance is placed on the judgement of Hon ble Supreme Court in the case of Committee of Creditors of Essar Steel India Ltd supra, to say that the successful Resolution App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred . In other words, it is only a Financial Creditor whose debt is in default who can file proceedings under Section 7 of the Code for CIRP to be initiated. This itself is clearly indicative that the term Financial Creditor is not necessarily synonymous with default. If it were necessarily synonymous, there was no question of Section 7 of the Code requiring a Financial Creditor to also prove a default for initiation of CIRP. It is a patently misconceived contention that after the CIRP is initiated at the instance of a Financial Creditor whose financial debt was in default, only such other persons whose financial debts are in default are entitled to file claims with the IRP/RP for the status of Financial Creditors in the CIRP. This also becomes clear from Section 21(2) of the Code which provides that the [t]he committee of creditors shall comprise all Financial Creditors of the corporate debtor without any requirement of the Financial Creditor s debt being in default. It is submitted that the Applicant s contention does significant violence t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lves an undertaking by the Corporate Debtor by virtue of Clauses 2, 3 and 5(iii) of DoH to pay the entirety of the amounts of RCOM s default which fulfills the ingredients of a guarantee and renders the same a financial debt under Section 5(8)(i) of the Code. It is submitted that the fundamental distinction between the facts of the present case and Anuj Jain (supra) is apparent from para 36.3, 43, 47.2 of the judgment in Anuj Jain (supra). z. The Applicant placed reliance upon certain legal commentaries containing sample drafts/specimens of deeds of hypothecation to contend that words similar to clause 5(iii) of the DoH are also to be found in such sample drafts/specimens. On this basis, the Applicant contended that if words similar to clause 5(iii) of the DoH are being provided by a borrower then upholding Respondents contention that the said words constitute a guarantee, in law, would result in the conclusion that borrowers are guaranteeing their own debts under the sample drafts/specimens of deeds of hypothecation, which can never be the case. However, this contention is merely a red-herring and is entirely misconceived. The DoH is a document in writing between the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sbursed money to the Corporate Debtor. iii. The Master Security Trustee Agreement dated 04.03.2011 was entered between RCOM group entities and ATSL pursuant to which ATSL was appointed as Common Security Trustee with respect to the security created on the assets of RCOM entities including the Corporate Debtor. iv. The Lenders who have advanced facilities to RCOM entities and who wish to have pari passu benefit of the same security could accede to the MSTA while signing the Deed of Accession. All the lenders of RCOM entities including the Applicant have acceded to MSTA, which means that all the lenders have pari passu sharing of security amongst the secured lenders. v. In terms of the Loan Agreement, Facility Agreement and the MSTA, the RCOM group entities in their capacity as Chargors executed the Deed of Hypothecation in favour of ATSL. vi. Even though the DoH is named as such, it is categorically stated in Section 5(iii) thereof that if the Event of Default has occurred, the security trustee or its nominees on receiving instructions from secured lenders would be entitled to take charge or/and possession etc. or otherwise dispose of or deal with the hypothe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said guarantee clearly falls within the four corners of Section 5(8)(a) and 5(8)(i) of the Code and the debt is undoubtedly a financial debt as provided under the Code. xi. The contention of the Applicant that there is no disbursal of any amount or loan to the Corporate Debtor and hence there is no financial debt is untenable. Here the loans were disbursed to RCOM entities and the Corporate Debtor had given guarantee in favour of the Respondents. xii. When there is a Financial Debt due, irrespective of the fact that the same is defaulted or not, a claim can be made in the CIRP proceedings. For making a claim under CIRP, it is not required that the said debt should have been defaulted. We accept the contention of the Respondents that they were within their rights in filing the claim before the IRP as Financial Creditors. In this regard, the reliance of the Applicant on the judgement of Swiss Ribbons supra is totally misplaced since Swiss Ribbons deals with the debt and default for triggering CIRP process and the issue of limitation. In this respect, it is beneficial to refer Section 18 of the Code wherein it is provided that: (1) the IRP shall perform the fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in filing a claim as a Financial Creditor. xvi. If the proposition of the Applicant that no claim can be made before the IRP/RP, until the debt is defaulted is accepted, then except the petitioning creditor whose petition has been admitted for the reason that there is debt and default, the other debtors whose debts are not defaulted by the Corporate Debtor cannot file claim and that would lead to an unenviable proposition that only the defaulted debts of the creditors can be claimed and the rest will end up in a remediless situation. The said proposition of the Applicant is entirely foreign to the Code. In this regard, the reliance of the Applicant on the decision of the Hon ble Supreme Court in the case of Swiss Ribbon (supra), Para 63 to 65 is totally misplaced since the paras referred deals with the differentiation in the triggering of the CIRP by Financial Creditors under Section 7 and Operational Creditors under Section 8 9 of the Code and not with the filing of claim with the RP. Para 65 of the Hon ble Supreme Court s case in Swiss Ribbon supra is extracted below: 65. Whereas a claim gives rise to a debt only when it becomes due, a default occurs only when a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f there is any shortfall/deficit in the expenses which the Security Trustee could not repay from the sale proceeds that shortfall/deficiency has to be collected from the Chargors and it does not relate to the deficiency/shortfall that will take place after adjusting the sale proceeds to the debt recoverable. The Ld. Counsel submitted that in view of this, there is no guarantee as provided under Section 126 of the Contract Act. Without prejudice to the above submission, it is further submitted that there is no occasion for the Security Trustee to realize the hypothecated properties in view of the fact that moratorium has triggered on admission of the CIRP petition against the Corporate Debtor as provided under Section 14(1)(c) of the Code. It is further submitted that the security interest as defined under Section 3(31) of the Code does not have any effect as long as the moratorium continues. In this case, since moratorium has already kicked in there is no question of realization of the security interest by the Security Trustee. It is further submitted that in case the resolution plan then pending for approval of the Bench is rejected, the Respondents as Creditors can either relinqu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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